In a different life, I worked extensively at Bain & Co. in the supply chain and retail industries. It put me on the radar of Amazon.com and various VC firms, as the e-commerce wave was arriving in the late 1990s.
I’m thinking about those moments as I read a WSJ article on how Target has fired its CEO, joining companies such as J.C. Penney, American Eagle Outfitters, and others looking for new leadership. Those jobs will not be easy to fill. It’s always tough to make money in retail, and it’s even harder because of the Internet.
The economics of retail are difficult: they’re really like airlines with tremendous fixed costs. A retailer has to pay for a lease, build out a store, stock a store with inventory, and then, staff it.
It is tough to make money in a high fixed-cost business, as you are really reliant on volume. Airlines obsess about “seat fill rate,” hotels focus on “percentage of rooms rented,” and consulting/law/banking firms need “high labor utilization rates.” The biggest driver of profits in those fixed cost businesses is volume. So, retailers need a lot of foot traffic.
Well, e-commerce has taken away much of that volume. I don’t know about you, but I personally hate shopping and buy everything I can via e-commerce. I have diverted my spending way from retailers.
I think you can say similar things will happen to any business that needs a lot of warm bodies to make their revenue models work and which risk disintermediation via the Internet.
It has been said that “software is eating the world.” I agree. You only have to look at retail as a prime example.